SB FINANCIAL GROUP, INC. (SBFG) FY 2022 MD&A

Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SB
Financial Group, Inc. (“SB Financial”), is a financial holding company registered with the Federal Reserve Board and subject
to regulation under the Bank Holding Company Act of 1956, as amended. Through its direct and indirect subsidiaries, including The State
Bank and Trust Company (“State Bank”), SB Financial is engaged in commercial and retail banking, wealth management and private
client financial services.

The
following discussion provides a review of the consolidated financial condition and results of operations of SB Financial and its subsidiaries
(collectively, the “Company”). This discussion should be read in conjunction with the Company’s consolidated financial
statements and related footnotes as of and for the years ended December 31, 2022 and 2021.

Strategic
Discussion

The
focus and strategic goal of the Company is to grow into and remain a top decile (90th percentile) independent financial services
company. The Company intends to achieve and maintain that goal by executing our five key initiatives.

Increase
profitability through ongoing diversification of revenue streams: For the twelve months ended December 31, 2022, the Company generated
$18.2 million in noninterest income, or 31.6 percent of total operating revenue, from fee-based products. These revenue sources include
fees generated from saleable residential mortgage loans, retail deposit products, wealth management services, saleable business-based
loans (small business and farm service) and title agency revenue. For the twelve months ended December 31, 2021, the Company generated
$30.7 million in noninterest income, or 44.8 percent of total operating revenue from fee-based products.

Strengthen
our penetration in all markets served: Over our 119-year history of continuous operation in Northwest Ohio, we have established a
significant presence in our traditional markets in Defiance, Fulton, Paulding and Williams counties in Ohio. In our newer markets of
Bowling Green, Columbus, Findlay, Toledo (Ohio) and Ft. Wayne (Indiana), our current market penetration is minimal but we believe our
potential for growth is significant. In the past years, we have expanded and committed additional resources to our presence in the Findlay
and Edgerton markets in particular; however, we continue to seek to expand the presence and penetration in all of our markets.

Expand
product utilization by new and existing customers: As of December 31, 2022, we operated in 14 counties in Northwest Ohio and Northeast
Indiana with 23 full service offices, 23 ATM’s and six loan production offices. Combined in the 14 counties of operation, we command
4.3 percent of the deposit market share, which has steadily grown.

33

Deliver
gains in operational excellence: Our management team believes that becoming and remaining a high-performance financial services company
will depend upon seamlessly and consistently delivering operational excellence, as demonstrated by the Company’s leadership in
the origination and servicing of residential mortgage loans. As of December 31, 2022, the Company serviced 8,514 residential mortgage
loans with an aggregate principal balance of $1.35 billion. As of December 31, 2021, the Company serviced 8,614 loans with an aggregate
principal balance of $1.36 billion.

Sustain
asset quality: As of December 31, 2022, the Company’s asset quality metrics remained strong. Specifically, total nonperforming
assets were $5.1 million, or 0.38 percent of total assets. Total delinquent loans at December 31, 2022 were 0.27 percent of total loans.
As of December 31, 2021, the Company had total nonperforming assets of $6.5 million, or 0.49 percent of total assets. Total delinquent
loans at December 31, 2021 were 0.46 percent of total loans.

The
successful execution of these five strategies have enabled the Company to improve financial performance across a broad series of metrics.
These metrics over the last five years are outlined in the following table. Specifically, the Company has increased total assets by $348.8
million, or 35.3 percent. The growth has been on both sides of the balance sheet over the five year period, with loans growing

$190.2
million or 24.6 percent and deposits growing $284.1 million or 35.4 percent.

During
the prior five-year period, the Company has raised capital through the issuance of equity and debt to the market on two separate occasions
during the period, which has raised equity capital significantly and expanded liquidity for potential strategic expansion. Strategic
expansion has also occurred during the period with the acquisition of a small community bank (The Edon State Bank of Edon, Ohio) in 2020,
the opening of three branch offices and the acquisition of two full service title agencies.

34

Financial Highlights

Year
Ended December 31,

1 Cash dividends on common shares divided by net income available to common.

Critical
Accounting Policies

The
accounting and reporting policies of the Company are in accordance with generally accepted accounting principles in the United States
and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail
in the notes to the Company’s Consolidated Financial Statements for the years ended December 31, 2022 and 2021. The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.
The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral
to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important
to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult,
subjective or complex.

35

Allowance
for Loan Losses: The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio.
Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in the nature and amount of
problem assets and associated collateral, underwriting activities, loan portfolio composition (including product mix and geographic,
industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation
is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates
of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political
conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge offs.

The
Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for
commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual
loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the
portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or
group of loans. The allowance for credit losses relating to impaired loans is based on each impaired loan’s observable market price,
the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless
of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent,
but undetected, losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining
information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of
individual loan valuations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger non- homogeneous credits and the sensitivity of assumptions
utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related
to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecise risk associated with the
commercial and consumer allowance levels and the estimated impact of the current economic environment.

Goodwill
and Other Intangibles: The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other
intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are
amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances
indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment
analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future.
Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends,
specific industry conditions and changes in competition.

Deferred
Tax Asset: The Company has evaluated its deferred tax asset to determine if it is more likely than not that the asset will be realized
in the future. The Company’s most recent evaluation has determined that the Company will more likely than not be able to realize
the remaining deferred tax asset.

Income
Tax Accounting: The Company files a consolidated federal income tax return. The provision for income taxes is based upon income in
the consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change
in rates on the deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

Changes
in Financial Condition

Total
assets at December 31, 2022, were $1.34 billion, compared to $1.33 billion at December 31, 2021. Loans (excluding loans held for
sale) were $962.1 million at December 31, 2022, compared to $822.7 million at December 31, 2021. Total deposits were $1.09 billion
at December 31, 2022, compared to $1.11 billion at December 31, 2021. As client balance sheets and liquidity was utilized in the
economy, deposit levels moderated and assets were reallocated from cash and securities into loans.

36

The
following are the condensed average balance sheets of the Company for the years ending December 31 and includes the interest earned or
paid, and the average interest rate, on each asset and liability:

The
following tables set forth the effect of volume and rate changes on interest income and expense for the periods indicated. For purposes
of these tables, changes in interest due to volume and rate were determined as follows:

37

The
maturity distribution and weighted-average interest rates of debt securities available-for-sale at December 31, 2022, are set forth in
the table below. The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective
interest rates considering amortization or accretion if the securities were purchased at a premium or discount:

38

Loans
held for investment increased $139.4 million, or 16.9 percent, to $962.1 million at December 31, 2022, which was due to an increase in
residential and commercial real estate lending during 2022. The Company booked a much higher portion of residential real estate production
on the balance sheet as saleable pricing was not competitive during much of 2022.

Concentrations
of Credit Risk: The Company makes commercial, real estate and installment loans to customers located mainly in the Tri-State region
of Ohio, Indiana and Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and, in the case
of agricultural loans, crops and farm equipment and the loans are expected to be repaid from cash flow from operations of businesses.
As of December 31, 2022, commercial business and agricultural loans made up approximately 29.6 percent of the loans held for investment
(“HFI”) loan portfolio while commercial real estate loans accounted for approximately 42.5 percent of the HFI loan portfolio.
Residential first mortgage loans made up approximately 20.9 percent of the HFI loan portfolio and are secured by first mortgages on residential
real estate, while consumer loans to individuals made up approximately 7.0 percent of the HFI loan portfolio and are primarily secured
by consumer assets.

Maturities
and Sensitivities of Loans to Changes in Interest Rates: The following table shows the maturity distribution of loans outstanding
as of December 31, 2022. The amounts have been categorized between loans with a fixed or floating interest rate (floating rate loans
have an adjustable interest rate that changes in accordance to a rate index).

39

Maturities
and Sensitivities of Loans to Changes in Interest Rates

As of December 31, 2022

Deposits
decreased $26.4 million, or 2.4 percent, to $1.09 billion at December 31, 2022. Deposits declined in 2022 after experiencing over $200
million in growth during 2021. Increased inflation and interest rates resulted in clients seeking higher returns on their deposit accounts.
As a result, during 2022, we experienced a shift in the mix of our deposit balances as more of our clients moved balances to long-term
time deposit accounts. Specifically, during 2022, time deposits increased $34.4 million, or 22 percent, while other deposits decreased
$60.8 million, or 6 percent.

The
average amount of deposits and weighted-average rates paid are summarized as follows for the years ended December 31:

Time
deposits that exceeded the FDIC insurance limit of $250,000 are summarized as follows:

40

Shareholders’
equity at December 31, 2022, was $118.4 million or 8.9 percent of total assets compared to $144.9 million or 10.9 percent of total assets
at December 31, 2021. Retained earnings increased during the year due to earnings of $12.5 million less dividends paid to common shareholders
of $3.4 million and repurchases of Company common shares of $5.8 million. The fair market value of the bond portfolio regressed during
2022 due to the valuation adjustment on the portfolio, which resulted in a decline in accumulated other comprehensive income (“AOCI”)
of $30.3 million.

The
Company continued to repurchase its own stock during the year. Specifically, the Company repurchased approximately 317,000 shares during
2022 at an average price of $18.43 per share. As of December 31, 2022, the Company had 480,682 shares remaining of the 500,000 shares
authorized for repurchase under the Company’s existing share repurchase program, which was authorized on December 21, 2022 and
expires December 31, 2024.

Nonperforming
assets consisting of loans, Other Real Estate Owned (“OREO”) and accruing TDRs totaled $5.1 million, or 0.38 percent of total
assets at December 31, 2022, a decrease of $1.4 million, or 21.1 percent from 2021. The Company had total net recoveries on loans in
both 2022 and 2021, with $13,000 in net recoveries in 2022, following $181,000 in net recoveries for all of 2021. The Company’s
allowance for loan losses at December 31, 2022, now covers nonperforming loans at 319 percent, up from 315 percent at December 31, 2021.

41

The
following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios at December 31 for the
years indicated:

The
allowance for loan losses balance and the provision for loan losses are determined by management based upon periodic reviews of the loan
portfolio. In addition, management considers the level of charge offs on loans, as well as the fluctuations of charge offs and recoveries
on loans, in the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly,
the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past
loss experience, economic conditions, information about specific borrower situations, including their financial position and collateral
values, and other factors and estimates which are subject to change over time.

The
Company has substantially increased the reserve level over the last several years. Specifically, since December 31, 2019 the allowance
for loan losses balance has increased from $8.8 million to $13.8 million at December 31, 2022, which is an increase of $5.0 million or
59 percent. This increase was the result of $5.6 million in provision expense during the period ($4.5 million in 2020 and $1.1 million
in 2021) and minimal charge-offs, which were just $0.5 million over the two-year period. The reserve has remained flat in 2022 as a result
of increased loan growth that has been offset by improving economic conditions.

42

The
following schedule provides a breakdown of the allowance for loan losses allocated by type of loan and related ratios at December 31
for the years indicated:

As
detailed in the risk factors, the CARES Act provided for significant consumer and small business relief due to the impact of the COVID-19
pandemic. The Company provided payment relief to a number of consumer and small business customers throughout 2020 and 2021, which we
believe was successful and enabled our clients to weather the pandemic effectively. All such COVID-related payment deferrals had expired
or been removed by December 31, 2021 and all clients were back to contractual terms at such date.

Regulatory
capital reporting is required for State Bank only, as the Company is currently exempt from quarterly regulatory capital level measurement
pursuant to the Small Bank Holding Company Policy Statement. As of December 31, 2022, State Bank met all regulatory capital levels required
to be considered well-capitalized (see Note 16 to the Consolidated Financial Statements).

On
May 27, 2021, the Company issued and sold $20.0 million in aggregate principal amount of its 3.65% Fixed to Floating Rate Subordinated
Notes due 2031 in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The Subordinated
Notes bear interest at a fixed rate of 3.65% through May 31, 2026. From June 1, 2026 to the maturity date or earlier redemption of the
Subordinated Notes, the interest rate will reset quarterly to an interest rate per annum, equal to the then-current-three-month Secured
Overnight Financing Rate (“SOFR”) provided by the Federal Reserve Bank of New York plus 296 basis points. The proceeds from
the Subordinated Notes will be used to assist the Company in meeting various corporate obligations, including share buyback, acquisition
costs and organic asset growth. The Subordinated Notes have a maturity of 10 years.

Earnings
Summary – 2022 vs. 2021

Net
income for 2022 was $12.5 million, or $1.77 per diluted share, compared with net income of $18.3 million, or $2.56 per diluted share,
for 2021. State Bank reported net income for 2022 of $13.4 million, which was down from the $18.6 million in net income in 2021. SBFG
Title reported net income for 2022 of $0.4 million, which was down from net income of $0.5 million in 2021.

Positive
results for 2022 included loan growth of $141.4 million when excluding the impact of the PPP initiative, while deposits were slightly
lower by $26.4 million. The Company completed the final forgiveness in December of 2022 from the nearly 1,200 PPP loans processed during
2020 and 2021. The mortgage banking business line, despite the headwinds from rapidly rising rates, continued to contribute in both balance
growth and gain on sale. For the full year of 2022, residential real estate loan production was $313.0 million, with $4.3 million of
revenue from gains on sale. The level of mortgage origination was down from the $600.0 million in 2021. The Company’s loans serviced
for others ended the year at $1.35 billion, down slightly from $1.36 billion at December 31, 2021.

Operating
revenue decreased by $11.0 million, or 3.9 percent, from $68.6 million in 2021 to $57.6 million in 2022 due to decreased PPP fees, OMSR
recapture and significantly lower mortgage gain revenue. SBFG Title increased revenue by $0.1 million to $2.2 million for 2022.

43

Operating
expense decreased by $2.5 million, or 5.6 percent, from $44.8 million in 2021 to $42.3 million in 2022, due to lower incentive and commission
levels, which were offset by higher medical costs and increased spending on technology.

Results
of Operations

Net
interest income was $39.4 million for 2022 compared to $37.9 million for 2021, an increase of $1.5 million or 4.0 percent. Despite the
reduction in PPP fees of $3.6 million compared to 2021, 2022 margin revenue was able to grow due to a favorable shift in mix on the balance
sheet. Average earning assets decreased slightly to $1.23 billion in 2022, compared to $1.24 billion in 2021, due lower cash and securities,
partially offset by the increase in our loan portfolio. The consolidated 2022 full year net interest margin on an FTE basis increased
16 basis points to 3.22 percent compared to 3.06 percent for the full year of 2021. The Company benefited from the Federal Reserve’s
seven interest rate increases in 2022, which increased margin revenue from our variable rate loans and securities.

Zero
provision for loan losses was taken in 2022 compared to $1.0 million taken for 2021. For 2022, net recoveries totaled $0.01 million,
compared to net recoveries of $0.18 million or (0.02) percent of average loans, for 2021.

44

Total
noninterest income was $18.2 million for 2022 compared to $30.7 million for 2021, representing a decrease of $12.5 million, or 40.6 percent,
year-over-year. Mortgage gain on sale was down significantly from the record year in 2021 by $13.0 million. The Company sold $184.8 million
of originated mortgages into the secondary market in 2022, which due to being less than the amortization on the serviced portfolio, reduced
the size of our serviced loan portfolio to $1.35 billion at December 31, 2022 from $1.36 billion at December 31, 2021. Sales of non-mortgage
loans (small business and farm credits) increased in 2022 as compared to 2021, as SBA activity returned to normal production. The Company
saw its wealth management assets under management decline by $111.2 million to $507.13 million, however price increases and higher brokerage
activity held the revenue decline for the year to only 2.3 percent.

Total
noninterest expense was $42.3 million for 2022 compared to $44.8 million for 2021, representing a $2.5 million, or 5.6 percent, decrease
year-over-year. Total full-time equivalent employees ended 2022 at 269, which was down one from year end 2021.

Earnings
Summary – 2021 vs. 2020

Net
income for 2021 was $18.3 million, or $2.56 per diluted share, compared with net income of $14.9 million, or $1.96 per diluted share,
for 2020. State Bank reported net income for 2021 of $18.6 million, which was up from the $16.0 million in net income in 2020. SBFG Title
reported net income for 2021 of $0.5 million, which was down from net income of $0.6 million in 2020.

Positive
results for 2021 included loan growth of $18.5 million when excluding the impact of the PPP initiative, and deposit growth of $64.0 million.
The Company fully participated in both phases of PPP, with a total of $111.4 million in loans to over 1,100 clients with revenue of $3.4
million for 2021 compared to $1.4 million for 2020. The mortgage banking business line continued to contribute significant revenues,
with residential real estate loan production of $600.0 million for the year, resulting in $17.3 million of revenue from gains on sale.
The level of mortgage origination was down from the $694.2 million in 2020. The Company’s loans serviced for others ended the year
at $1.36 billion, up from $1.30 billion at December 31, 2020.

Operating
revenue increased by $2.6 million, or 3.9 percent, from $66.0 million in 2021 to $68.6 million in 2020 due to increased PPP fees and
OMSR recapture which offset lower mortgage gain revenue. SBFG Title increased revenue by $0.1 million to $2.1 million for 2022.

Operating
expense increased by $1.7 million, or 4.0 percent, from $43.1 million in 2021 to $44.8 million in 2020, due to compensation and fringe
benefit cost increases and higher spend on technology/digital initiatives. These expense increases were offset by lower mortgage commission
expense due to lower volume.

45

Goodwill,
Intangibles and Capital Purchases

The
Company completed its most recent annual goodwill impairment review as of December 31, 2022. At December 31, 2022, the Company concluded
that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The
Company’s goodwill is further discussed in Note 6 to the Consolidated Financial Statements.

Management
plans to continue from time to time to purchase additional premises and equipment and improve current facilities to meet the current
and future needs of the Company’s customers. These purchases will include buildings, leasehold improvements, furniture and equipment.
Management expects that cash on hand and cash generated from current operations will fund these capital expenditures and purchases.

Liquidity

Liquidity
relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide
for operating expenses. Sources used to satisfy these needs consist of cash and due from banks, interest-bearing deposits in other financial
institutions, securities available-for-sale, loans held for sale and borrowings from various sources. These assets, excluding the borrowings,
are commonly referred to as liquid assets. Liquid assets were $270.8 million at December 31, 2022, compared to $422.9 million at December
31, 2021.

The
Company does not have material cash requirements for capital expenditures over the next year. Any cash needs for capital requirements
would be funded by cash existing at the Company. It is not anticipated that the Company will be required to initiate external borrowings
in order to fund ongoing operations.

The
Company’s commercial real estate, first mortgage residential, agricultural and multi-family mortgage portfolio of $768.5 million
at December 31, 2022, can and is readily used to collateralize borrowings, which is an additional source of liquidity. Management believes
the Company’s current liquidity level, without these borrowings, is sufficient to meet its current and anticipated liquidity needs.
At December 31, 2022, all eligible commercial real estate, residential first, multi-family mortgage and agricultural loans were pledged
under a Federal Home Loan Bank (“FHLB”) blanket lien.

Significant
additional off-balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks
and the national certificate of deposit market. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial
to earnings. Based on the current collateralization requirements of the FHLB, approximately $80.9 million of additional borrowing capacity
existed at December 31, 2022.

At
December 31, 2022 and 2021, the Company had $56.0 million in federal funds lines available. The Company also had $166.5 million in unpledged
securities at December 31, 2022 available for additional borrowings.

The
cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash as well as an indication
of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2022 and 2021
follows:

The
Company experienced positive cash flows from operating activities in 2022 and 2021. Net cash from operating activities was $25.6 million
and $17.3 million for the years ended December 31, 2022 and 2021, respectively. Significant operating items for 2022 included gain on
sale of loans of $4.9 million and net income of $12.5 million. Cash provided by the sale of loans held for sale were $189.5 million.
Cash used in the origination of loans held for sale were $181.2 million.

The
Company experienced negative cash flows from investing activities in 2022 and 2021. Net cash used in investing activities was $165.7
million and $72.0 million for the years ended December 31, 2022 and 2021, respectively. The changes for 2022 include the purchase of
available-for-sale securities of $50.6 million, and net increase in loans of $139.7 million. The changes for 2021 include the purchase
of available- for-sale securities of $170.7 million and net decrease in loans of $48.5 million. The Company had proceeds from repayments,
maturities, sales and calls of securities of $35.9 million and $50.5 million in 2022 and 2021, respectively.

46

The
Company experienced positive cash flows from financing activities in 2022 and 2021. Net cash from financing activities was $18.4 million
and $63.6 million for the years ended December 31, 2022 and 2021, respectively. Negative cash flows of $26.4 million and positive cash
flows of $64.0 million is attributable to the change in deposits for 2022 and 2021, respectively.

The
Company uses an Economic Value of Equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows
over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s
assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The results of this analysis
are reflected in the following table.